RAM Ratings has reaffirmed the AA2/stable rating of UEM Group Berhad's (UEM or the Group) Islamic MTN Programme of up to RM2.2 billion (2012/2042), issued through funding vehicle, United Growth Berhad (United Growth).
The rating takes into consideration UEM's favourable corporate lineage, given that it is fully owned by Khazanah Nasional Berhad (Khazanah), the Malaysian Government's investment-holding arm. UEM is important to Khazanah in view of its holdings of substantial stakes in strategic tolled roads and large tracts of land in Iskandar Puteri (previously known as Nusajaya) - part of the Government's Iskandar Malaysia economic corridor. Based on RAM's methodology on rating government-linked entities (GLEs), we expect a moderately high likelihood of support from Khazanah.
UEM's 4 core businesses - expressways, engineering and construction, township and property development and asset and facility management (AFM) - underpin the Group's strong business diversity. The stable earnings from its expressways and AFM segments have cushioned the construction segment's losses in the past, and will continue to provide good buffer against the cyclicality of the property and construction sectors. Further, its expressways, property development and AFM segments have strong business profiles, underscored by the local highways' strategic alignments, its position as one of the largest developers locally and as a leading provider of AFM services.
The Group's debt level rose 52% y-o-y to RM7.28 billion as at end-June 2015 to fund the construction of concession assets and development activities. Nevertheless, its balance sheet is still healthy, with adjusted net gearing ratio of 0.30 times, cushioned by sizeable capital base, large cash pile and liquid money-market instruments. Due to the heavier-than-anticipated debt load, its funds from operations debt cover (FFODC) for 1H FY Dec 2015 has reduced to an annualised 0.11 times, although it is likely to be higher for fiscal 2015.
As debt level is likely to stay elevated to cater to the funding needs of its property and construction businesses, the Group's FFODC is projected to remain modest at around 0.13 times in the next 2 years. Nevertheless, about 40% of its debts comprise concession-related borrowings (which are typically long-term and supported by project cashflows) and the large cash pile will keep its FFO net-debt cover above 0.2 times. We remain cautious about any material increase in debts or depletion of cash holdings to fund any investments, which have yet to be firmed up but which could substantially change its financial profile.
The patchy track record of its construction segment and the property arm's high concentration in Iskandar Puteri continue to moderate the Group's rating. Land holdings in Iskandar Puteri accounts for about 60% of UEM's land bank, making it susceptible to the softer market and potential oversupply of high-rise developments within Iskandar Malaysia. We are cognisant of the Group's diversification efforts into the Klang Valley as well as abroad, although the entry into the Australian market necessitates heftier working capital due to local practice where bulk of the payment will be made to the developer upon project completion.
Elsewhere, dividends from its toll-road concessions were lower y-o-y in fiscal 2014 (-52%), but increased by about 50% in fiscal 2015 despite the heavier debt obligations of the expressways assets after the restructuring in 2012. Nonetheless, the scheduled principal repayments may impact future dividends.
United Growth was set up to raise the IMTN, and is wholly owned by UEM. Through an irrevocable and unconditional purchase undertaking, the sukukholders are effectively exposed to UEM's credit risk, as reflected in the rating of the IMTN.
-Ends-
Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my
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